In 2017 the then-chancellor, Philip Hammond, told the German newspaper Welt am Sonntag that the UK was “a European-style economy… but if we are forced to be something different, then we will have to become something different”. Hammond’s remarks were interpreted as a threat: that Europe would need to offer the UK a favourable deal or risk creating a major liberal economy on its doorstep, a deregulated, low-tax “Singapore-on-Thames”.
Rishi Sunak’s Budget, with its focus on freeports and a plan for a more lightly regulated financial sector, suggests that such a threat, or elements of it, is being acted upon. But this plan ignores a crucial fact: that a loose regulatory environment is not the only thing businesses need to invest.
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Singapore-on-Thames was always a bizarre vision. The attributes that Singapore boasts – a highly globalised economy and entrepôt, a successful international financial centre and being a magnet for investment – were already present in the UK. London was already a leading financial capital and one of the world’s most popular investment destinations. The UK had long occupied a place near the top of the league tables for foreign direct investment (FDI), with inward investment levels that remained strong even during the global financial crisis of 2007-08.
Singapore is an economic success story. But it draws a small fraction of the inward investment enjoyed by the UK, which attracts people and capital from all over the world while serving as a cultural and geographical bridge between the US and Europe. The question now is how long Britain’s investment appeal will remain intact.
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The high watermark for overseas investment in Britain came in 2015, when the UN Conference on Trade and Development (UNCTAD), one of the world’s main sources of FDI statistics, reported that the UK had received $53.7bn in announced greenfield investments. “Greenfield investments” refer to companies setting up new physical presences in another country, or expanding existing facilities. They almost always involve creating new jobs, which makes them the most productive form of investment for the economy.
After the shock of the Brexit vote, the figure fell to $32.1bn in 2017 and then to $28.3bn in 2018, before bouncing back somewhat to $36.1bn in 2019. Figures from the Department for International Trade show that the number of projects and jobs created via FDI have dropped since the vote.
The size of new investment projects – which is determined by the amount invested and the number of jobs they create – reduced in the UK in this post-Brexit-vote period, while other countries experienced FDI increases, suggesting investors were hedging their exposure to Brexit uncertainty by reducing their UK footprint and shoring up capital in EU markets.
Covid-19 disrupted investment levels almost everywhere, which makes it hard to measure the ongoing impact of Brexit. UNCTAD announced in January 2021 that FDI fell by 42 per cent globally in 2020.
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For a post-Brexit UK, this means that the investment climate will not be favourable for some time. Britain now faces the dual challenge of overcoming Brexit- and Covid-related uncertainties as it seeks the inward investment it needs to regrow the economy. One of these impacts was avoidable.
This is a problem for the UK more than for other countries because the UK is more reliant on FDI than other advanced economies. The UK was already “Global Britain”: in 2019-20, inward investment created 56,117 new jobs.
For investors, Brexit is far from being “done”. As the government finalises the details of its split from the EU, it is crucial that policymakers understand what made the UK so competitive for investment in the first place. The UK is on its fourth Chancellor in a decade, but businesses take a long-term perspective when they invest abroad.
The UK may be able to give Singapore a run for its money. The trouble is, it had more money in the first place. As far as foreign investors are concerned, it is now gambling that money on a less favourable hand.